Falling rig counts and a shutdown of a major Libyan oil port is slowing the oil market breakdown despite OPEC showing no signs of changing course on oil output as they target U.S. shale producers. After spiking to new lows overnight, oil is trying to mount a comeback as Libya's eastern Al-Sider oil export port has been shut due to fighting breaking out in al-Hilal, an important oil production area.
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Reports that an attack from Fajr Libya, an anti-government coalition, led to heavy fighting as the group tried to take over the Al-Sidra oil terminal. The group said its goal was to "liberate oilfields and terminals" in an area that is home to Libya’s biggest terminals Ras Lanuf and Brega.
Another sign that OPEC’s war on U.S. shale is having an impact came on Friday after Baker Hughes rig count reported that oil rigs targeting oil fell by 19 to 1,546 -- which was the biggest weekly drop in over two years. Rigs targeting oil fell to the lowest level since last June. Obviously the free fall in price is freezing producers and potential producers and even though we should see production continue to be strong in the short term in the long run the cracks in the shale revolution are starting to show. Still production from shale should continue to be strong as rigs from shale produce more oil and many producers are hedged and have their capital expenditures in place. Yet latest in the year we should see the impact from fewer projects going forward.
Where the cut in rig counts is really being felt is in natural gas. While the rigs drilling for natural gas increased by two to 346, unlike oil supply for natural gas are well 9.5% below the average range for this time of year. Yet natural gas prices sold off with oil yet with oil stabilizing natural gas is rebounding. I think the traders are finally realizing that OPEC is flooding the world with oil not natural gas. That is one reason for the natural gas sharp rally despite warm temperatures in the Mid-West.
OPEC is still digging in even though Iran thinks the sell-off is a political conspiracy. The UEA is saying that there is no need for an emergency meeting and that OPEC can afford oil at $40 a barrel. They are not hiding the fact that their target is U.S. shale and if prices knock out some shale producers for OPEC its oils well that ends well, I guess.
In the meantime, the drop in oil prices is going to create a new set of problems for the Fed as they meet this week. The Fed is dropping hints that they removed the reference to “considerable time” from their statement yet the drop in oil prices may make it harder for the Fed to signal rate increases that could strengthen the dollar and put further pressure on oil. The Fed so far has been saying what a great thing this drop in oil prices has been.
The good news is gasoline prices continue to fall and what is more they look today like the weakest part of the petroleum complex. There are parts of the country where we are seeing prices below $2.00.
For oil, the close is today is very important for market sentiment this week. The sharp comeback in overnight trading might signal at least a respite in the relentless selling and maybe a short term bottom. Traders may be wary of being aggressively short with Libya seeming erupting in violence and the uncertainty of what to expect from the FOMC. Still if the rally flops and we close lower more than likely the sell-off will continue. Next key support for oil is $55 which they failed to test overnight.
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